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China puts digital-renminbi plans on hold

The power of payment companies in domestic systems may be throwing sand in the gears of central-bank digital currencies.



China is becoming a cashless society and leads the world in the mobile payments—which, ironically, may be why the People’s Bank of China is now putting the brakes on digitizing the yuan.

David Wen, chairman of a digital-currency focus group at the International Telecommunication Union, says Chinese central bankers participating in the group have grown cautious about debuting a digital fiat currency (DFC).

The digital-asset industry worldwide has been excited by the prospect of a major central bank issuing a digital version of its currency, with hopes raised by such a proposal formulated by a PBoC official, Yao Qian.

Yao is director of the PBoC’s Institute of Digital Money and vice chairman of the ITU’s focus group, which also counts representatives from more than 20 other central banks. Yao had presented how a digital fiat might work to the group in New York in July.

However, speaking at the Money 20/20 conference last week in Hangzhou, Wen says PBoC officials on the ITU have changed course, preferring to see another country experiment.

He recalled a discussion with a senior PBoC official: “He said, ‘We’ve done lots of research to understand how it works, but we want a smaller country to try it first; it will be easier for them to adopt this.’”

Payment system pitfalls
This means China is joining the U.S. as the other big power taking a wait-and-see approach to digital fiat.

Wen told DigFin he understands the Federal Reserve Bank is not ready to issue digital dollars because credit-card usage in the U.S. is high, and credit-card companies would put up fierce resistance to erosion of their hold on payment rails.

In China, on the other hand, the ubiquity of mobile payments creates a different barrier: they’re too advanced. “WeChat Pay and Alipay already cover a lot of applications that could be done by digital fiat,” he told DigFin in a phone call. “The marginal benefit of promoting DFC is not as high as it would be in countries that use more cash.”

That said, he argues some quasi-cashless countries like Sweden could implement a DFC more easily because they are small and “homogenous”.

He told his audience in Hangzhou that China’s DFC research has recently changed direction to include not only banks, but also payment companies. The model Yao Qian promoted in ITU’s workshop is to combine the existing electronic wallet and the digital fiat under one account.

“China started researching DFC quite early; only Bank of England started at the same time, in 2014,” said Wen. “The direction has slowly changed to a multi-tier model, with the central bank, commercial banks and other types of payment systems being part of the infrastructure where DFC would be operating.”

Integrating everything
In China, issuing a digital currency that wasn’t integrated into things like WeChat pay and Alipay would be backward step for convenience in society, Wen argues.

Even with the presence of mobile payments, however, a digital fiat can provide added security, says Rohan Grey, director of research at the Digital Fiat Currency Institute.

“DFC would also be more interoperable among different payment companies’  rails,” he told DigFin. He says mobile payment wallets can be incorporated into DFC system that transfers liabilities from the chat app to the DFC network.

The PBoC may also be reacting to legal challenges, however, says Yang Dong, director of fintech and internet research at Renmin University of China. Would a DFC require individuals to have an account at the PBoC? Today only banks have access to a central bank’s discount window, which is used to pump liquidity into the financial system; adding non-bank institutions, let alone individuals, to the central bank’s liquidity operations would be a radical change in how they manage the economy. “A DFC could have great impact on monetary policy,” Yang told DigFin.

On the other hand, there could be challenges if only banks retain access to the central bank’s liquidity management. In China, only licensed banks participate in the PBoC’s currency-issuance operation, but internet companies conducting payments have superior technology and data.

Wen’s speech coincides with the pause of a DFC trial at Tsinghua University. It may just be coincidental. But Tsinghua launched a trial in September with China UnionPay and Aershan Financial Technology to process payments at the school cafeteria, using a QR code matching payments to designated debit cards, with the university’s token currency paired to the renminbi (like a stable coin).

Technically this experiment had nothing to do with the PBoC, which was not involved. But, curiously, the school’s digital token was called “Central Bank Digital Currency”. Perhaps the moniker, more than the experiment itself, was deemed inappropriate.

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